BMI Philippines Food and Drink Report Q2 2017

Q2 2017 www.bmiresearch.com

PHILIPPINES FOOD & DRINK REPORT INCLUDES 5-YEAR FORECASTS TO 2021

Published by:BMI Research

Philippines Food & Drink Report Q2 2017 INCLUDES 5-YEAR FORECASTS TO 2021

Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: February 2017 ISSN: 1749-2882

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Philippines Food & Drink Report Q2 2017

CONTENTS BMI Industry View ............................................................................................................... 7  Latest Updates And Industry Developments . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 7 

SWOT .................................................................................................................................... 8 Food & Drink ........................................................................................................................................... 8

Industry Forecast .............................................................................................................. 10 Food ..................................................................................................................................................... 10  Latest Updates .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 10 Structural Trends ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ 11 Table: Food Sales, 2014-2021 ............. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 13

 Drink .. .. .. .. ............................................................................................................................................ 15  Latest Updat e s ....................................................................................................................................... 15 Structural Tr e nds ................................................................................................................................... 15 Table: Total Alcoholic Drinks Spending And Consumption (Philippines 2014-2021) .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 17  Table: Non-Alcoholic Drinks Sales, 2014-2021 . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 19

 Mass Grocery Retail .. .. .. .. .. .. .. .. .. .............................................................................................................. 20  Latest Updates ....................................................................................................................................... 20 Structural Trends ................................................................................................................................... 20

Food & Drink Risk/Reward Index ..................................................................................... 22  Asia Pacific - Risk/Reward Index ................................................................................................................ 22 Table: Asia Pacific Food & Drink Risk/Reward Inde x Q217 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Philippines Risk/Reward Index ... ........ ........ ......... ........ ....... ........................................................................ 23  Rewards .. ............................................................................................................................................. 23  Risks .. .. .. .............................................................................................................................................. 24

Market Overview ............................................................................................................... 26 Food ..................................................................................................................................................... 26   Recent Developments .............................................................................................................................. 26   Market Driver s And Trends ....... ......... ........ ........ ...................................................................................... 26   Drink .. .. .. .. .. .......................................................................................................................................... 28  Recent Developments .............................................................................................................................. 28  Market Drivers And Trends ...................................................................................................................... 28  Mass Grocer   y Retail ................................................................................................................................ 30  Recent Develo pments .. .. .. .. .. .. .. .. .. .. .. ........................................................................................................ 30  Market Drivers And Trends . .. ................................................................................................................... 30

Competitive Landscape .................................................................................................... 32 Table: Key Players In The Philippine Food Industry ... ... .. ... ... ... .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... .. 32 Table: Key Players In The Philippine Drink Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Table: Key Players In The Philip pine Mass Grocery Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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Philippines Food & Drink Report Q2 2017

Company Profile ................................................................................................................ 35  Alaska Milk Corporation .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 35  LT Group .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 38 Philippine Seven Corp ........ ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... .. 40 San Miguel Brewery ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ..... 43 SM Investments ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ .... 45 Universal Robina Corp ....... ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... .. 47 

Demographic Forecast ..................................................................................................... 50 Table: Population Headline Indicators (Philippines 1990-2025) ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... .. ... ... ... .. . 51 Table: Key Population Ratios (Philippines 1990-2025) .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... .. ... ... ... .. . 51 Table: Urban/Rural Population & Life Expectancy (Philippines 1990-2025) . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 52 Table: Population By Age Group (Philippines 1990-2025) .. ... ... ... .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... .. 52 Table: Population By Age Group % (Philippines 1990-2025) .. ... ... .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... .. 53

Glossary ............................................................................................................................. 55 Food & Drink ........................................................................................................................................ 55  Mass Grocery Retail . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 55

Methodology ...................................................................................................................... 57  BMI Food & Drink Forecasting & Sourcing ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 57   Risk/Reward Ratings Methodology .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 58 Table: Rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 9 Table: Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Table: Weighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

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Philippines Food & Drink Report Q2 2017

BMI Industry View  BMI View: We

maintain our positive outlook for the Philippines' food and drink sector on the back of rising

incomes and favourable demographics. The drinks sector stands out as an outperformer, being driven by dynamic consumer preferences. We also maintain our positive outlook for development of the mass grocery retail sector which is experiencing a flurry of investment.

Food And Drink Spending 2014-2021 8,000,000

6,000,000

4,000,000

2,000,000

0 2014

2015

2016e

Food, sales, PHPmn

2017f

2018f

2019f

2020f

2021f

Non-alcoholic drinks, sales, PHPmn

e/f = BMI estimate/forecast. Source: BMI, National statistics

Latest Updates And Industry Developments ■

■

■

Food consumption (local currency) is expected to grow 7.7% in 2017, with a compound annual growth rate (CAGR) of 8.3% to 2021. Alcoholic drinks sales (local currency) is expected to grow 7.7% in 2017, with aof 8.2% to 2021. Non-Alcoholic drinks sales (local currency) is expected to grow 9.5% in 2017 with a CAGR of 9.9% to 2021.

■

The Mass Grocery Retail (MGR) sector will remain underdeveloped throughout our forecast period.

■

We expect the MGR sector to expand rapidly over our forecast period on the back of rising investment.

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Philippines Food & Drink Report Q2 2017

SWOT Food & Drink

SWOT Analysis

Strengths

■

The industry is home to one of the region's leading food and drink conglomerates, San Miguel Corporation (SMC), and spun-off brewing subsidiary San Miguel Brewery, thus enhancing its reputation considerably and aiding the early establishment of industry best practices.

■

The country's soft drink and alcohol sectors are hugely profitable since they are able to capitalise on a young consumer base with a strong interest in Western brands and consumption preferences.

■

In the food retail sector, local operators have proved very effective at combining aspects of modern retail with local traditions, tastes and customs in order to encourage more consumers to make the switch.

Weaknesses

■

The food processing industry suffers from various structural problems including limited domestic input, inefficient post-harvest and storage facilities and inadequate distribution links.

■

Per capita income remains low, and unemployment levels continue to be a major concern, with a large segment of the population unable to afford processed food products.

■

Traditional outlets still account for around 75% of food retail sales, and underdeveloped distribution infrastructure continues to make supplying retail outlets inefficient and often costly.

Opportunities

■

Consumption levels are increasing, assisted by rising disposable incomes among middle- and upper-class consumer groups, which should spur growth in the processed food sector.

■

Western influences are strong in the country, ensuring a receptive audience for new Western products and consumption methods.

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Philippines Food & Drink Report Q2 2017

SWOT Analysis - Continued

■

The ongoing development of mass grocery retail in the country will mean improved distribution opportunities for food manufacturers.

Threats

■

Slow development of the mass grocery retail network in rural areas negatively impacts both volume and value sales of foodstuffs in general.

■

Implementation of the ASEAN Economic Community will expose the Philippines to heightened competition from food processors in other ASEAN countries.

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Philippines Food & Drink Report Q2 2017

Industry Forecast Food  BMI View: Rising

incomes will drive growth in the demand for higher-value products such as meat &

 poultry and fish. Furthermore, the expanding mass grocery retail sector will shape consumption patterns such that they become westernised.

Latest Updates ■

■

■

Food consumption (local currency) is expected to grow 7.7% in 2017, with a compound annual growth rate (CAGR) of 8.3% to 2021. Per capita food consumption (local currency) is expected to grow 6.1% in 2017, with a CAGR of 6.7% to 2021. Consumption trends among high income consumers are starting to mirror developed market trends.

Food Sales 2014-2021 6,000,000

9

8.5 4,000,000 8

7.5 2,000,000 7

0

6.5 2014

2015

2016e

Food, sales, PHPmn (LHS)

2017f

2018f

2019f

2020f

2021f

Food, sales, PHPmn, % growth y-o-y (RHS)

e/f = BMI estimate/forecast. Source: BMI, National statistics

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Philippines Food & Drink Report Q2 2017

Structural Trends We maintain a positive outlook for the Philippines' food industry, which is poised for strong growth over our forecast period. Robust population growth together with income growth will drive consumption in the sector through to 2021. We expect top line food consumption to grow at 7.7% over 2017 before accelerating to 8.5% in 2018.

Rising incomes together with growing remittances inflows will drive growth in higher value categories over the coming years. We forecast the meat & poultry; fish & fish products and dairy categories to outperform in the food sector- growing at a CAGR of 10.7%; 11.7% and 11% respectively. Strong growth in these segments will also be driven by the growing demand for high protein diets in the Asia-Pacific region. Filipino consumption trends are starting to mirror those in developed Asia among high income consumers. However, characteristically low incomes in the market will constrain premiumisation trends- constraining discretionary spending growth.

Over the medium-to-longer term, sustained economic growth will increase consumption among middle- and upper-income groups, particularly in the country's growing urban centres, where the continued spread of  mass grocery retailers (MGRs) will also help fuel increased food spending. Essential food and beverage items, predominantly cheap, fresh produce, account for the bulk of the diet for most of the population (per capita food consumption remains very low relative to many South East Asian economies). However, a gradual trading up process, and local food manufacturers' efforts to cater for this process, will support consumption growth in value terms.

Confectionery

Chocolate is the largest form of confectionary consumed in the Philippines and will likely stay this way for the long term. Multinational firms such as Hershey's and Nestlé exist within the country, driving growth through effective marketing schemes. However, we believe that sugar confectionary will rise as a proportion of total consumption, although not substantially.

Over the longer term, there are four key drivers that will underpin the confectionery sector's growth: ■

Rising Consumer Affluence: With confectionery products typically viewed as indulgence goods, growing incomes over the coming years will clearly serve as a major impetus behind confectionery demand. Rising purchasing power is expected to fuel purchases of higher-value confectionery products such as chocolate, although we stress that price will remain a key purchasing determinant for local consumers given that incomes remain relatively low.

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Philippines Food & Drink Report Q2 2017

■

■

■

Sustained Sector Investments: Investment by industry players such as Universal Robina Corporation (URC), Petra Foods and Nestlé will remain integral towards supporting sector growth. As a case in point, Swiss food major Nestlé invested in a new facility in the Philippines, as it looks to cater to rising demand for its Bear Brand milk and Coffee-mate non-dairy creamer. Nestlé also plans to continue investing in its four existing factories in the Philippines, maintaining a focus on upgrading technology and equipment. Meanwhile, URC continued to expand capacities in its key categories such as biscuits and to venture into new product categories such as packaged cakes. These i nvestments will imbue the sector with greater dynamism to support growth. Growing Health Awareness: As confectionery producers expand their portfolio to include healthier alternatives such as low-fat choices to cater to an increasingly health-conscious consumer base, this will provide another impetus to value sales growth given that these products typically carry higher price tags. Spread Of Mass Grocery Retail: The formalisation of the food retail sector will provide more distribution channels for domestic confectionery producers to reach the end-consumer market.

Dairy

Per capita dairy consumption levels across Asia have been rising in recent years. While consumption of  dairy products remains low in the Philippines, we expect strong growth over the coming years. Given this consumption potential, the government has developed ambitious plans to boost production under the National Dairy Development Plan. While the country's competitiveness in the powdered milk segment remains low, the government believes that it can boost production in the fresh milk category.

Under the plan, milk production is targeted to reach 153.86mn litres (158,430 tonnes) in 2019/20 and then 647.83mn litres (667,100 tonnes) by 2029/30. While we expect strong growth in dairy production from its current low base, we do not believe these targets are realistic. Unless there is significant consolidation in the industry and more investment is poured in, we believe that the existence of small-scale farmers will hamper significant growth in the sector.

Food Services

Fast food is an integral part of Philippines dining culture, largely due to rapid urbanisation, cultural affinities with the US and a high proportion of outsourcing industries with night-time working hours. Local quick service restaurant chains dominate the market despite the presence of fast food giants McDonalds and

KFC. For example, Jollibee Foods and its subsidiaries Chow King and Greenwich control 46% of the food services segment.

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Philippines Food & Drink Report Q2 2017

Table: Food Sales, 2014-2021

2014

Food, sales, PHPmn Food, sales, PHPmn, % growth y-o-y Bread, rice and cereals, sales, PHPmn Bread, rice and cereals, sales, PHPmn, % growth y-o-y

2015

2016e

2017f

2018f

2019f

2020f

2021f

3,291,947.1 3,509,954.9 3,761,524.5 4,052,805.8 4,397,328.7 4,764,750.2 5,164,825.2 5,600,486.3 7.4

6.6

7.2

7.7

8.5

8.4

8.4

8.4

973,730.2 1,015,396.4 1,062,242.1 1,115,043.1 1,175,806.9 1,239,662.4 1,306,264.8 1,377,150.7

4.8

4.3

4.6

5.0

5.4

5.4

5.4

5.4

5,372.4

5,468.0

5,564.2

5,659.0

5,751.5

5,833.7

5,897.5

5,947.5

Pasta products, sales, PHPmn, % growth y-o-y

2.1

1.8

1.8

1.7

1.6

1.4

1.1

0.8

Baked goods, sales, PHPmn

29,356.3

30,137.0

30,965.0

31,839.0

32,771.8

33,691.9

34,563.3

35,416.9

Baked goods, sales, PHPmn, % growth y-o-y

3.0

2.7

2.7

2.8

2.9

2.8

2.6

2.5

714,513.4

778,168.3

852,524.6

Meat and Poultry, sales, PHPmn, % growth y-o-y

10.1

8.9

9.6

Fish and fish products, sales, PHPmn

697,005.0

766,831.7

848,710.4

Fish and fish products, sales, PHPmn, % growth y-o-y

11.6

10.0

10.7

11.4

12.3

11.9

11.6

11.5

Dairy, sales, PHPmn

353,132.6

385,678.8

423,740.5

468,406.5

521,964.6

580,190.2

643,774.9

713,779.4

Pasta products, sales, PHPmn

Meat and Poultry, sales, PHPmn

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939,683.4 1,044,077.4 1,157,468.3 1,281,152.8 1,417,213.4

10.2

11.1

10.9

10.7

10.6

945,048.7 1,060,862.6 1,187,025.5 1,325,164.4 1,477,534.0

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Philippines Food & Drink Report Q2 2017

Food Sales, 2014-2021 - Continued

2014

2015

2016e

2017f

2018f

2019f

2020f

2021f

10.5

9.2

9.9

10.5

11.4

11.2

11.0

10.9

Oils and Fats, sales, PHPmn

53,667.2

57,124.3

61,109.1

65,718.0

71,165.4

77,019.4

83,315.2

90,171.0

Oils and Fats, sales, PHPmn, % growth y-o-y

7.2

6.4

7.0

7.5

8.3

8.2

8.2

8.2

133,152.3

137,913.2

143,187.1

149,036.5

155,652.2

162,500.2

169,489.4

176,803.0

4.0

3.6

3.8

4.1

4.4

4.4

4.3

4.3

116,766.8

112,241.6

106,342.9

98,716.0

88,736.4

77,146.5

63,425.3

47,405.5

-3.4

-3.9

-5.3

-7.2

-10.1

-13.1

-17.8

-25.3

44,445.4

45,448.1

46,476.3

47,488.1

48,354.3

45,988.1

47,675.9

49,050.6

2.7

2.3

2.3

2.2

1.8

-4.9

3.7

2.9

170,805.6

175,547.4

180,662.4

186,167.6

192,185.7

198,223.9

204,101.7

210,014.4

3.2

2.8

2.9

3.0

3.2

3.1

3.0

2.9

Dairy, sales, PHPmn, % growth y-o-y

Fresh and preserved fruit, sales, PHPmn Fresh and preserved fruit, sales, PHPmn, % growth y-o-y Fresh vegetables, sales, PHPmn Fresh vegetables, sales, PHPmn, % growth y-o-y Sugar and sugar products, sales, PHPmn Sugar and sugar products, sales, PHPmn, % growth y-o-y Other food products, sales, PHPmn Other food products, sales, PHPmn, % growth y-o-y

e/f = BMI estimate/forecast. Source: BMI, National statistics

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Philippines Food & Drink Report Q2 2017

Drink  BMI View: The

Philippines' drinks sector will continue to show strong growth over our forecast period on

the back of dynamic consumer preferences in both the alcoholic and non-alcoholic sectors. The nonalcoholic drinks segment will outperform over this period, driven by hot drinks and carbonated soft-drinks.

Latest Updates ■

Alcoholic drinks consumption (local currency) are expected to grow 7.7% in 2017, with a compound annual growth rate (CAGR) of 8.2% to 2021.

■

Alcoholic drinks sales (litres) are expected to grow 5.2% in 2017, with a CAGR of 6.5% to 2021.

■

Spirits will outperform on the back of aggressive innovation in the sector.

■

■

■

Non-Alcoholic drinks sales (local currency) are expected to grow 9.5% in 2017, with a CAGR of 9.9% to 2021. Soft drinks sales (local currency) are expected to grow 9.1% in 2017, with a CAGR of 9.5% to 2021. Coffees, teas and other hot drinks sales (local currency) are expected to grow 10% in 2017, with a CAGR of 10.3% to 2021.

Structural Trends Alcoholic Drinks

The Philippines' alcohol sector will experience robust growth over our forecast period with strong growth in both alcohol spending and alcohol consumption, which we forecast to grow at a CAGR of 8.2% and 6.5% to 2021, respectively. We forecast the spirits segment to experience the strongest growth, this coming from a low base, growing at a CAGR of 7.7% over the forecast period.

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Philippines Food & Drink Report Q2 2017

Total Alcohol Consumption Total Alcohol Consumption, 2014-2021, litres mn 4,000

10

7.5

3,000

5 2,000 2.5 1,000

0

0

-2.5 2014

2015

2016e

2017f

2018f

2019f

2020f

2021f

Total alcohol consumption,sales, litres mn (LHS) Total alcohol consumption, litres mn, % change yoy (RHS)

e/f = BMI estimate/forecast. Source: BMI, WHO

Strong spirits consumption is due to the emerging cocktail culture in the market, which is being driven by aggressive product innovation by domestic player San Miguel Brewery. Spirits consumption is experiencing strong growth via on-trade channels due to a growing number of craft bars in urban areas. We forecast whiskey to outperform in the segment, growing at a CAGR of 8.1% to 2021. We expect the readyto-drink (RTD) segment to become increasingly popular with the advent of San Miguel's 'Ginebra San Miguel' product lines.

As is the case with the country's soft drinks industry, the Philippines' alcoholic drinks industry is dynamic, attractive and has high-growth. Alcohol consumption is widespread, and the industry is well-established. In line with domestic income growth, consumers are likely to gradually trade up to more expensive brands and variants, creating a significant opportunity for investors and explaining our expectations for value sales to outperform volume sales.

Beer will continue to dominate alcohol sales in the country by some distance, continuing to account for more than 66% of total volume sales by 2021 in spite of the explosive growth expected for the wine and

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Philippines Food & Drink Report Q2 2017

spirits market. Craft beer is starting to gain momentum in the Philippines with well-established breweries in Manila, Iligan City, Cebu and Angeles City. Growing consumption of craft beers is indicative of  premiumisation in the alcohol sector, which is underpinned by rising incomes.

Wine will remain the reserve of higher-income consumers only, and yet, owing to a very low base, growth is expected to be strong, thanks to the country's sustained economic development. With that said, hikes in taxes on alcoholic drinks are expected to have a marginal impact on volumes.

Table: Total Alcoholic Drinks Spending And Consumption (Philippines 2014-2021)

2014e

2015e

2016e

2017f

2018f

2019f

2020f

2021f

69.04

73.62

78.89

84.97

92.14

99.78

108.08

117.12

7.45

6.64

7.16

7.71

8.44

8.29

8.32

8.36

3,043.33 3,162.13 3,306.15 3,479.24 3,691.23 3,916.05 4,161.48

4,429.70

 Alcoholic drinks spending, PHPbn  Alcoholic drinks spending, PHP %  Alcoholic drinks spending, PHP per household  Alcoholic drinks spending, PHP per capita

696.41

731.13

771.56

818.64

874.70

933.50

996.76

1,064.83

Total alcohol consumption, sales, litres mn

2,116.6

2,182.2

2,273.7

2,391.3

2,536.1

2,704.4

2,896.9

3,113.1

Total alcohol consumption, litres mn, % change y-o-y

0. 2

3. 1

4.2

5.2

6. 1

6. 6

7. 1

7.5

Total alcohol consumption, litres per capita

31.5

31.8

32.6

33.6

35.0

36.7

38.6

40.7

1,491.6

1,539.2

1,603.8

1,684.8

1,781.9

1,891.4

2,013.0

2,145.9

0.3

3 .2

4. 2

5.0

5. 8

6.1

6 .4

6. 6

Beer, litres per capita

22.2

22.5

23.0

23.7

24.6

25.6

26.8

28.1

Wine, litres mn

11.2

11.3

12.0

12.6

13.4

14.2

15.1

16.0

Wine, litres mn, % change y-o-y

2.1

0.8

6. 0

5.3

6. 2

6.0

6.3

6. 3

Wine, litres per capita

0 .2

0. 2

0.2

0.2

0. 2

0 .2

0. 2

0. 2

613.8

631.6

657.9

693.9

740.8

798.9

868.8

951.2

Spirits, litres mn, % change y-o-y

0. 0

2. 9

4 .2

5.5

6.8

7. 8

8. 8

9. 5

Spirits, litres per capita

9. 1

9.2

9 .4

9.8

10.2

10.8

11.6

12.5

Beer, litres mn Beer, litres mn, % change y-o-y

Spirits, litres mn

e/f = BMI estimate/forecast. estimate/forecast. Source: National sources, BMI

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Philippines Food & Drink Report Q2 2017

Non-Alcoholic Drinks

The country's soft drinks industry is, and will remain, one of its most dynamic food and beverage subsectors. Levels of investment in the industry remain huge, as does multinational interest, both of which have been demonstrated by the events surrounding PepsiCo and The Coca-Cola Company in the Philippines over the recent years. Both companies will be looking to consolidate their number one and two positions, ahead of domestic rivals such as Cosmos and Zest-O.

Non-Alcoholic Drinks Sales 2014-2021 600,000

10.5

10 400,000 9.5

9 200,000 8.5

0

8 2014

2015

2016e

2017f

2018f

2019f

2020f

2021f

Non-alcoholic drinks, sales, PHPmn (LHS) Non-alcoholic drinks, sales, PHPmn, % growth y-o-y (RHS)

e/f = BMI estimate/forecast. estimate/forecast. Source: BMI, National statistics

Beyond simple expansion, innovative new product development will be a key sales growth driver. The leading players are already looking beyond carbonates into higher-value, more innovative product categories to cater to the country's youthful and increasingly affluent consumers, and these launches are being backed up by substantial promotional and marketing investments.

Both tea and coffee sectors are reasonably mature but have not yet been inundated with the range of  premium and healthy brands that have fuelled growth over long periods in other markets in the region. It

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Philippines Food & Drink Report Q2 2017

will most likely be the introduction of such products that will drive growth in these sectors to 2021. However, the industries will suffer adversely from a preference for soft drink consumption in the country and the strength of both the soft drink and alcoholic beverage industries, which will prevent premiumisation fuelling growth of the levels witnessed in other countries.

US coffee giant Starbucks has operated within the country since 1997, yet low incomes across much of the population remain the largest barrier to growth. Currently, around 200 stores have been opened, but there are no significant expansion plans. This is primarily the case for tea and coffee outlets across the country. While there is a trade, most of the population do not earn enough for such luxuries. Rather, growth in both the tea and coffee sector will come from brew-at-home sales from retailers.

Table: Non-Alcoholic Drinks Sales, 2014-2021

 

2014 20

2015

2016e

2017f

2018f

2019f

2020f

2021f

Non-alcoholic drinks, sales, PHPmn

240,564.1

260,881.9

284,327.7

311,474.5

343,583.3

377,826.2

415,112.3

455,715.0

Non-alcoholic drinks, sales, PHPmn, % growth y-o-y

9. 7

8. 4

9.0

9. 5

10.3

10.0

9.9

9.8

Coffee, teas and other hot drinks, sales, PHPmn

114,689.5

124,910.8

136,709.3

150,374.0

166,540.6

183,785.4

202,566.0

223,020.0

Coffee, teas and other hot drinks, sales, PHPmn, % growth yo-y

10.3

8.9

9.4

10.0

10.8

10.4

10.2

10.1

125,874.6

135,971.2

147,618.4

161,100.4

177,042.7

194,040.8

212,546.4

232,695.0

Soft drinks, sales, PHPmn, % growth yo-y

9. 2

8. 0

8.6

9. 1

9.9

9 .6

9.5

9.5

Fruit and vegetable  juices, sales, PHPmn

78,931.4

84,902.5

91,788.0

99,755.5

109,174.1

119,213.8

130,141.5

142,037.4

Fruit and vegetable  juices, sales, PHPmn, % growth y-o-y

8. 6

7. 6

8.1

8. 7

9.4

9 .2

9.2

9.1

Mineral or spring waters, sales, PHPmn

1,682.7

1,799.3

1,933.7

2,089.1

2,272.7

2,468.3

2,681.1

2,912.8

Mineral or spring waters, sales, PHPmn, % growth y-o-y

7. 8

6. 9

7.5

8. 0

8.8

8 .6

8.6

8.6

45,260.5

49,269.4

53,896.7

59,255.9

65,596.0

72,358.8

79,723.7

87,744.8

Soft drinks, sales, PHPmn

Carbonated drinks, sales, PHPmn

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Philippines Food & Drink Report Q2 2017

Non-Alcoholic Drinks Sales, 2014-2021 - Continued

 

2014

2015

2016e

2017f

2018f

2019f

2020f

2021f

Carbonated drinks, sales, PHPmn, % growth y-o-y

10.2

8.9

9.4

9.9

10.7

10.3

10.2

10.1

e/f = BMI estimate/forecast. Source: BMI, National statistics

Mass Grocery Retail  BMI View: The

Philippines' mass grocery retail sector is poised for robust growth on the back of rising

investment. Growth in the sector will further be driven by robust consumption growth in the food and drink  sector, which will spur value growth.

Latest Updates ■

■

We expect the Mass Grocery Retail (MGR) sector to expand rapidly over our forecast period on the back  of rising investment, although it will remain largely underdeveloped overall. The dominance of essential spending in the Philippines retail sector will drive investment in the MGR sector.

Structural Trends The Philippines MGR sector is set to expand rapidly over our forecast period on the back of rising investment from existing players. Underpinning our view, Philippine Seven Corporation (which operates 7Eleven in the country) has been aggressively expanding in the market. As of June 2016, the company's store count in the market was 1,740, up from 1,405 in the same period in 2015. Domestic retailers are also expanding. The Metro Retail Stores Group (multi-format retailer and largest supermarket operator in the market) has allocated PHP10bn in order to double its store network by 2020. According to the company, it will have achieved 40% of this plan by 2018. In terms of retail space, Robinsons Retail Holding Inc (a large multi-format retail operator in the Philippines) plans to invest USD100mn in ten new community malls by 2020, which will help facilitate MGR expansion.

Food and non-alcoholic drink spending is the most important component of household consumption, accounting for around 40% of total retail spending. Not only does it hold a dominant position, but we forecast the segment will also experience strong growth in absolute terms. We also believe that the current expenditure distribution among the different retail segments will remain unchanged, with food & drink  retaining the lead. With that said, a strong outlook on food and drink spending translates into a strong sales growth outlook for the MGR sector.

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Philippines Food & Drink Report Q2 2017

While the longer-term outlook for the Philippine organised grocery retail sector is more positive than its near-term outlook, we stress that the growth prospects nonetheless pale in comparison to the developing regional retail markets in spite of the sector's under-developed nature. Organised retail makes up around 25% of overall grocery retail sales in the Philippines, making it one of the less developed retail sectors in the region. We would attribute this to still low disposable incomes and the fact that large sections of the Philippine population remain beyond the reach of organised retailers in price terms. Furthermore, although the Philippine economy is expanding at a sizeable rate, such growth is not adequate to reduce the unemployment rate in the fast- expanding labour market.

Despite its sector immaturity, growth prospects in the Philippine retail sector do not match up to those of the emerging markets, which can be largely attributed to the fact that there is no major multinational involvement in the sector. As has been witnessed elsewhere in the region, the arrival of a cash-rich expansionary multinational typically gives a massive boost to growth both due to that firm's entry and expansion plans and due to the preparatory expansion efforts of existing retailers as they seek to protect their market share ahead of increased competition.

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Philippines Food & Drink Report Q2 2017

Food & Drink Risk/Reward Index  Asia Pacific - Risk/Reward Index  BMI View: The

average score for the Asia Pacific region in Q217 is 49.4. Developed markets dominate the

top positions of our Food & Drink Risk/Reward Index for the Asia Pacific region: Australia, Japan, Hong Kong, Singapore, New Zealand and South Korea. The bottom half of the table consisting of emerging markets have the potential to grow rapidly as food consumption and GDP levels steadily increase with economic development. India was one of the outperformers this quarter, jumping up the table from 15th to 14th position, while Japan also greatly improved its score. New Zealand was one of the underperformers this quarter.

Table: Asia Pacific Food & Drink Risk/Reward Index Q217

Reward

Industry   Reward

Country  Reward

Risk

 Australia

62.7

50

75

74.3

84

65

67.3

Japan

61.4

46

77

67.4

85

50

63.8

Hong Kong

59

52

66

70

73

68

63

Singapore

48

28

68

77

81

72

59

South Korea

49

40

58

74

80

67

59

New Zealand

48.1

34

62

69.1

85

53

56.5

China

52.2

52

52

56.7

57.5

56

54

Taiwan

39.5

26

53

73.2

80

66

53

Malaysia

44.3

40

49

62.7

60

65

51.6

Thailand

39.4

42

37

59.7

60

59

47.5

48

50

46

43

34

52

46

42.2

46

38

47.6

35

60

44.3

47

46

48

34.9

21.5

48

42.2

Philippines

40.8

36

46

43.7

37.5

50

42

Pakistan

50.2

50

50

25.3

9

42

40.3

47

58

35.9

26.3

5.5

47.1

38.7

Laos

38.0

40.0

35.9

24.1

5.5

42.7

32.4

Myanmar

33.2

28.0

38.3

22.0

3.5

40.5

28.7

 Average

 47.2

42.4

52.0

52.8

49.8

55.7 

Indonesia  Vietnam India

Cambodia

Industry Risk Country Risk Food & Drink Rating

 

49.4

Note: Each score is out of 100, with 100 the highest. The Food & Drink Risk/Reward Index is the principal index. It  comprises two sub-indices, 'rewards' and 'risks', which have a 60% and 40% weighting respectively. In turn, the

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Philippines Food & Drink Report Q2 2017

 Asia Pacific Food & Drink Risk/Reward Index Q217 - Continued

Reward

Industry   Reward

Country  Reward

Risk

Industry Risk Country Risk Food & Drink Rating

'rewards' index comprises 'industry rewards' and 'country rewards', which have equal weighting and are based on  growth and size of a country's food, alcoholic drinks and soft drinks market (industry) and the broader economic and   socio-demographic environment (country). The 'risks' index comprises 'industry risks' and 'country risks', which also have equal weightings and are based on a subjective evaluation of the market's regulatory and competitive issues (industry)  and its broader country risk exposure (country), which is based on BMI's proprietary Country Risk Index. Source: BMI

Philippines Risk/Reward Index The Philippines ranks 14th out of 15 markets in our Asia Pacific Risk/Rewards Index in Q217, ahead of  Pakistan. Weak scores in the Industry Reward and Total Risks scores are the main disadvantage to this market, performing well below the regional average.

Rewards The Philippines scores 40.8 for rewards in Q217.

Industry Rewards

The Philippines underperforms in this metric with a score of 36, largely due to weak per capita food sales and a weak five-year food consumption outlook, which are currently at USD771.5 and 4.8%, respectively. The Philippine market is characterised by low food and drink spending levels, which generally imply lower scope for premiumisation growth, at least in the near-to-medium term. Interestingly, while low consumption levels in developing markets typically translate into massive room for future growth (given that consumerism is not as yet entrenched as elsewhere in the developed world) this is not the case in the Philippines. Due to sector crowding and the presence of industry majors such as the San Miguel

Corporation, which already dominate a sizeable market share, foreign industry players have found it difficult to make significant headway in the market. This inability to pull in foreign capital has clearly weighed on the growth prospects of the Philippine consumer-facing sectors.

Country Rewards

The country scores well in this metric, supported by a large and growing youthful population. However, low GDP per capita prevents a higher score. The Philippines scores 46 in this metric compared to 55 for the region. Nonetheless, the Philippine market does have a strong point, which is its enticing demographic profile. The Philippines has one of the largest populations in the region, and has a favourable demographic make-up as well. The country's youth population makes up 57% of its overall population, and this should

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Philippines Food & Drink Report Q2 2017

translate into considerable dynamism in the mass market. Low GDP per capita is indicative of weak  spending power which will limit discretionary spending and the scope for dynamism in the consumer market. We believe that the Philippines will see an improvement in this metric over the coming quarters as we forecast real GDP to grow at a robust rate over 2017.

Risks The country scores 43.7 for risks in the industry.

Industry Risk

The Philippines's industry risk score grossly underperforms the regional average - coming in at 37.5, compared to 58.8 for the region. This score is largely undermined by weak mass grocery retail penetration which acts as a deterrent to investment inflows in the food and drink sector. Lacking the pull of foreign capital in its mass grocery retail sector, the organised grocery retail sector remains fairly underdeveloped in the Philippines as compared to other markets such as Singapore and Japan. The absence of a developed organised grocery retail system to facilitate the distribution of consumer goods to the end-consumer market will remain a deterrent to foreign investors. Other factors such as under-developed physical infrastructure and excessive bureaucratic regulations continue to blight the Philippines's investment appeal.

Country Risk

The country performs just below the regional average in this metric: 50 compared to 58.2 for Asia Pacific. This metric is buoyed by the short-term economic growth outlook together with economic openness. With that said, bureaucratic obstacles and corruption remain major issues, which, along with inadequate transport networks and high labour costs, mean the Philippines is often overlooked in favour of other markets in the region.

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Philippines Food & Drink Report Q2 2017

Philippines Vs Asia-Pacific Q217 Risk Reward Scores

Note: Scores out of 100, with 100 being the best score. Source: BMI

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Philippines Food & Drink Report Q2 2017

Market Overview Food Recent Developments ■

■

Filipino consumption trends are starting to mirror those in developed Asia among high income consumers. Swiss food major Nestlé invested in a new facility in the Philippines, as it looks to cater to rising demand for its Bear Brand milk and Coffee-mate non-dairy creamer.

Market Drivers And Trends Food Processing

Agricultural inefficiency has inevitably had a knock-on effect on the country's food-processing industry, which has had to rely increasingly on imported ingredients and packaging materials to meet demand. Only larger companies have been able to modernise and upgrade their facilities, and a significant number of  manufacturers, particularly in rural areas, still rely on manual processes.

In spite of these inherent production problems, the food and beverage sectors in the country are increasingly influenced by Western branding and consumption habits. Busy lifestyles, particularly in urban areas where Western influences are at their strongest, have fuelled an interest in packaged and convenience foods spurring on growth in this sector. This trend has no doubt also been helped by the presence of regional industry behemoth San Miguel Corporation (SMC). Its marketing and distribution efforts have substantially increased exposure to branded foodstuffs in the country, causing the sector to develop at a faster pace than that witnessed in other comparable economies.

Again, perhaps aided by SMC and its influence on industry best practices in the region, local food manufacturers have focused on developing products that address the issue of inherent consumer price sensitivity, while still meeting consumer needs. An example of this has been packaging innovations. Manufacturers have introduced smaller pack sizes, which enable consumers to still buy potentially nonessential goods but in small volumes, and by using inexpensive packaging materials, the corresponding savings are passed on to consumers.

SMC operates a number of businesses across a diverse range of products, of which many dominate their respected markets. Monterey Foods Corporation, Philippines's largest pork and beef producer, is fully integrated in its meat operations, indicating the type of scale SMC holds. SMC is also in a joint venture with

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The Purefoods-Hormel Company, which accounts for almost two thirds of the processed meat market, leading both the refrigerated and canned goods market. Likewise, Magnola Inc, which manufactures and markets a wide range of dairy products, is by far and away the largest margarine producer in the country. Other companies under SMC's jurisdiction include Magnolia Ice Cream  and San Miguel Super

Coffeemix Company.

Around the Philippines, distribution and logistics networks are also improving. For example, in October 2012, Philippine food distributor Island Merchants Corporation (IMC) opened a new logistics centre. The facility is located on the National Road in Bacolod City. IMC CEO and President Manuel Parroco said that the new logistics centre would increase the company's ability to store and distribute products on behalf of its clients, including Swiss consumer goods company Nestlé.

Agriculture

Despite the Philippines's potential as a major agricultural producer, the country suffers from various major structural problems, such as a limited and unstable supply of domestic inputs, resulting in prices that can be higher than world market prices. Despite sustained growth in the country's major agricultural sub-sectors in recent years - the product of continued government efforts - the industry remains blighted by inefficiency or non-existent post-harvest storage facilities and hugely inadequate farm-t o-market support.

The Philippines government has repeatedly reiterated its commitment to the agricultural sector, both as a means of improving the country's trade balance - the country remains a major importer of many commodities including high-value dairy products - and as a means of improving the financial situation of  the rural poor. It is estimated that around 10mn people - just under half of the labour force - are employed in the agricultural sector, and that the industry almost exclusively employs poorer rural workers. By enriching these communities, the government can stimulate the contribution this section of society can make to the economy in general, through increased consumption, and not just through production.

However, government efforts are frequently criticised for failing to address real problems and for instead focusing on popular, but low financial return, crops such as rice. The country's high-value fisheries industry is largely overlooked, despite the contribution it could make to the economy, while certain agricultural crops that use around 90% of land available for harvesting return just 20% to the value of the industry. This inefficiency, coupled with problems concerning the convoluted process of deferring agricultural responsibilities to local government departments, has severely hampered the industry's potential and kept its contribution to GDP below 20%.

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Philippines Food & Drink Report Q2 2017

Organic Farming

Structural problems at the primary agricultural level have inhibited the potential of added-value sectors such as organic food. However, with more than 500 certified farms already in existence, the sector could be an important contributor to the country's agricultural economy in the future. While harnessing opportunities such as these remains secondary to more pressing problems such as improving rural living standards and agricultural aid allocation, pursuing high-value prospects is just the sort of thing that the government will eventually need to do to transform an under-performing industry into a dynamic one.

Drink Recent Developments ■

■

Craft beer is starting to gain momentum in the Philippines with well-established breweries in Manila, Iligan City, Cebu and Angeles City. Leading players are already looking beyond carbonates into higher-value, more innovative product categories to cater to the country's youthful and increasingly affluent consumers.

Market Drivers And Trends Hot Drinks

Hot drinks volumes remain driven by more affluent consumers, who use organised retail. However, higher raw materials and production prices in the past years have had an impact on the shape of the market, with consumers now making more careful purchasing choices. US retailer Starbucks has operated in the region for some time now, yet only has around 160 stores open. Nevertheless, innovation (especially with regard to 'healthier' alternatives), the development of specialty coffee and tea shops, and marketing campaigns organised by leading players - including Nestlé Philippines - in the sector will continue to drive the market forward.

Nestlé Philippines is a subsidiary of the Swiss food and beverage conglomerate. The company is especially prominent in coffee and other hot drinks segments in the Philippines. In the tea segment, another multinational, Unilever, is one of the key players, accounting for around a quarter of the retail market. Its leading brand is the affordable Lipton, which covers a variety of teas, from green to herbal.

Soft Drinks

Filipinos are among the largest consumers of soft drinks in Asia. Carbonated soft drinks continue to be the most popular sub-segment in the soft drinks sector despite the global increase in health consciousness,

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Philippines Food & Drink Report Q2 2017

which has led to the decline in soft drinks sales in other countries in the region. Bottled water, however, is experiencing strong growth rates, while powdered juice drinks remain popular. Bottled water producers include The Coca-Cola Company, Asia Brewery, Nestlé and Filipinas Water Bottling Company.

The market leader in the Philippine soft drinks sector is Coca-Cola Bottlers Philippines Inc (CCBPI), which is jointly owned by Coca-Cola FEMSA, Coke's leading bottler in Mexico, and The Coca-Cola

Company. CCBPI operates 23 production facilities throughout the country, producing carbonated soft drinks, sports drinks, juice and bottled water, together with 42 sales offices. The local Pepsi bottler is Pepsi

Cola Products Philippines.

The most popular bottled soft drinks in the Philippines are the international ones - for example Coca-Cola, Pepsi and Sprite. However, many of the brands which retail only in the Philippines, catering for specific tastes and lower budgets are also owned by the multinational players. Coca- Cola owns brands such as Jaz Cola and Lift, and Sarsi through its subsidiary Cosmos Bottling Corp.

Despite the rapid growth of soft drinks consumption, the industry is at risk of new excise taxes. In November 2015, a bill aiming to impose an excise tax on non-alcoholic beverages with added sugar and/or caloric/non-caloric sweetener was passed. If enacted, it will impose a PHP40 (USD0.22) tax on every litre sold, which poses significant threats to the sector.

Alcoholic Drinks

As the largest food and beverage company in the Philippines, and one of the largest firms in the Asia Pacific region, San Miguel Corporation (SMC) exerts significant industry influence, affecting local market forces such as price levels and shelf allocation. It is backed by considerable financial resources and an extensive distribution network, not to mention the pure marketing and recognition power of its brand.

Leading spirits producers include the subsidiaries of the country's major conglomerates Lucio Tan and, once again, SMC, which operates Tanduay Distillers and the Ginebra San Miguel units respectively. A similar situation exists in the beer market and the country's top brewers are San Miguel Brewery (SMB) and Asia Brewery (Lucio Tan), the latter producing Carlsberg under licence as well as its own range of  beers such as Manila Beer, Stag, Lone Star and Colt. SMC is the clear market leader, with an approximate 90% market share. Japan's Kirin Brewery holds a 48% stake in the spun-off brewing subsidiary SMB.

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Philippines Food & Drink Report Q2 2017

Faced with the threat of consumption saturation in the country's beer and spirits markets, the two leading breweries - San Miguel Brewery and Asia Brewery - have committed significant resources to marketing beer and spirits to women. Efforts have included re-branding and promotional campaigns, and San Miguel can claim success, with sales of its San Miguel Light brand, which is aimed at female consumers, exceeding all expectations.

In terms of the distribution of alcoholic drinks, around 75% goes through the off-trade, meaning it is sold through retail outlets as opposed to in bars and restaurants. In spite of price sensitivity in the Philippine economy, the country's alcoholic drinks market appears remarkably buoyant. The beer sector accounts for around two thirds of volume sales, with cheaper standard and economy lagers accounting for 94% of these beer sales.

Wine is a relatively small sub-sector of the alcoholic drinks market, although sales are accelerating rapidly from their low starting point, with light red wine by far the best seller. In comparison with the country's wine and beer segments, the spirits sector is fairly stagnant, with local favourites gin and rum continuing to dominate the market.

Mass Grocery Retail Recent Developments ■

■

Philippine Seven Corporation has been aggressively expanding in the market. As of June 2016, the company's store count in the market was 1,740, up from 1,405 in the same period in 2015. Robinsons Retail Holding Inc plans to invest USD100mn in ten new community malls by 2020, which will help facilitate MGR expansion.

Market Drivers And Trends Despite the liberalisation of foreign direct investment in the retail sector in the 2000s, foreign capital in the Philippines's food retail sector remains limited. In response to market liberalisation, domestic operators have started to modernise their outlets and increase the variety of products on offer - fearing an onslaught from global multinationals, such as Walmart and Carrefour, as has occurred in other recently liberalised markets in the region.

However, this onslaught has not yet occurred - with the country's retail potential not yet deemed strong enough to offset the economic risks that exist in the eyes of the major multinational retailers. In addition, the strong market power of leading domestic retailers has also acted as a deterrent for foreign actors. The country's fragmented geography requires adapted distribution systems, which favours actors with strong

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local knowledge. For instance, Puregold Price Club does not operate with a centralised distribution system. Instead, hypermarkets serve as distribution hubs for smaller stores, which we view as a positive move considering the fragmented geography of the country and traffic congestion in Manila. Therefore, we believe that foreign investment will be limited to regional retailers, especially through partnerships with local players. In early 2015, Dairy Farms increased its stake in Philippine retailer Rustan to 66%.

Metro Manila presently accounts for more than 50% of the country's total retail sales. However, other regions with urbanised centres are also becoming strong centres for retail activities, particularly as the retail sector in Metro Manila begins to mature and opportunities in the city decrease.

At present, the local sector largely comprises supermarkets and convenience stores. While the hypermarket concept has only been introduced recently, it has become increasingly popular among Filipino consumers. The sector as a whole continues to expand and modernise in response to consumer demand for convenience, product variety, food safety and quality. This demand is driven in particular by the country's young and upwardly mobile population, who continue to be attracted by Western lifestyle influences.

While markets and sari-sari stores (small convenience outlets) still account for the vast majority of food sales, their share is declining, albeit slowly, with the expansion of modern MGR chains. Philippine convenience stores mix the characteristics of the traditional sari-sari stores, but offer a wider range of  products in a well-lit, air-conditioned and strategic location. They are usually open 24 hours a day, seven days a week. This crossover between traditional forms of shopping and newer, more modern ideas is successful as it appeals not just to the country's youthful population, but also to older shoppers who value this style and are increasingly interested in more hygienic and pleasant surroundings.

Leading retailers include SM Investments, which operates hypermarkets, supermarkets and convenience stores in partnership with Alfamart, Puregold Price Club and Robinsons. In the organised convenience sector, leading players include Philippines Seven (a 7-Eleven franchisee in the Philippines) and Mini Stop (run by the Gokongwei group). Other smaller operators are Caltex Star Mart and Shell Select (petrol station stores), some Mercury Drug outlets and Finds Convenience Stores Inc , owned by Villar.

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Competitive Landscape Table: Key Players In The Philippine Food Industry

Company

Sub-Sector

Sales (PHPmn)

Sales (USDmn)

Financial  Year End

No Of Employees

 Year Established

San Miguel Corp

Food & beverages (and heavy industry)

673,900e

13,100e

Dec-15

18,538

1890

Nestle Philippines Inc

Food & beverages (snack foods, dairy)

111,745e

2,494e

Dec-13

3,500

1911

San Miguel PureFoods

Food - agri &   branded consumer

107,000e

2,200e

Dec-15

3,223

na

Unilever Philippines

Food - mixed branded consumer

17,320e

400e

Dec-11

na

na

Mondelez Philippines (Formerly Kraft Food Philippines)

Food - snack food

10,825e

250e

Dec-11

na

na

RFM Corp

Food - mixed branded consumer

11,010e

248e

Dec-14

454

na

General Milling Corp*

Food - pasta, flour products, snacks

7,000e

162e

Dec-11

na

1961

Century Pacific Corp

Food - canned food, seafood

23,300e

na

Dec-15

na

na

Food - flour products

4,200e

99e

Dec-12

na

1962

Food - canned food, seafood

na

81

Dec-14

2,361

2005

Pilmico Foods Corp  Alliance Select

 Note: Financial year is the latest available data; e = BMI estimate; na = not available. Source: BMI

Table: Key Players In The Philippine Drink Industry

Company

Sub-Sector

Sales (PHPmn)

Sales (USDmn)

Financial  Year End

No Of Employees

 Year Established

Food & beverages (snack foods, dairy)

111,745e

2,494e

Dec-13

3,500

1911

Beverages - alcoholic, beer

75,053

1,666

Dec-13

2,749

2008

Universal Robina Corp

Beverages confectionery & snacks

109,051

2,251

Sep-15

11,623

1954

Coca-Cola Bottlers Philippines Inc

Beverages - soft drinks

21,650e

500e

Dec-11

7,800

1927

Ginebra San Miguel

Beverages - alcoholic, spirits

14,921

336

Dec-14

879

na

Pepsi-Cola Products Philippines

Beverages - soft drinks

29,807

672

Dec-14

12,671

na

Nestle Philippines Inc San Miguel Brewery

© Business Monitor International Ltd

Page 32

Philippines Food & Drink Report Q2 2017

Key Players In The Philippine Drink Industry - Continued

Company

Sub-Sector

Sales (PHPmn)

Sales (USDmn)

Financial  Year End

No Of Employees

 Year Established

Beverages - alcoholic, spirits

52,154

1,175

Dec-14

12,671

1937

Beverages - dairy drinks

11,153e

249e

Dec-13

728

1972

Cosmos Bottling Corp

Beverages - soft drinks

7,939

176

Dec-10

55e

na

Zest-O Corporation

Beverages - soft drinks

3,500e

81e

Dec-11

na

1981

LT Group (Formerly Tanduay Holdings)  Alaska Milk

Note: Financial year is the latest available data; e = BMI estimate; na = not available. Source: BMI

Table: Key Players In The Philippine Mass Grocery Retail Sector

Parent Company 

SM Investments*

Suy Sing Commercial Corp

Country Of Origin

Sales (PHPmn)

Sales (USDmn)

Financial  Year End

Philippines

82,000e

1,700e

Dec-15

Philippines

21,650e

500e

Dec-11

Fascia

Format

Number Of Outlets

269 SM Supermarket

Supermarket

40

SM Hypermarket

Hypermarkets

42

SaveMore

Discount stores

113

WalterMart

Supermarkets

24

The SM Store

Department stores

50

Rustan's Supermarket

Supermarket

22

Shopwise

Hypermarkets

9

Philippine Seven Corp

Philippines

22,400

na

Dec-15

7-Eleven

Convenience Store

1,282

Price Smart

Philippines

4,330e

100e

Dec-11

Price Smart

Cash & Carry

4

Gokongwei Group

Philippines

3,464e

80e

Dec-11

Robinsons Supermarkets

Supermarket

66

Mini Stop

Convenience Store

120

Grand Union Supermarket Inc

Philippines

650e

15e

Dec-11

South Supermarkets

Supermarket

8

Uniwide Holdings

Philippines

217e

5e

Dec-11

Uniwide Sales

Supermarket

6

Netherlands

na

na

na

Shell Select

Convenience Store

100e

Shell

© Business Monitor International Ltd

Page 33

Philippines Food & Drink Report Q2 2017

Key Players In The Philippine Mass Grocery Retail Sector - Continued

Parent Company 

Caltex Puregold Price Club

Country Of Origin

Sales (PHPmn)

Sales (USDmn)

Financial  Year End

Fascia

Format

Number Of Outlets

Australia

na

na

na

Star Mart

Convenience Store

150e

Philippines

84,700

1,908

Dec-14

Puregold Price Club

Supermarket

200e

Puregold Junior

Convenience Store

na

Puregold Extra

Discount Store

na

Note: Financial year is the latest available data; *total group earnings - retail merchandise segment revenue for FY2013 = PHP180,900mn (73.3% of total revenue); e = BMI estimate; na = not available. Source: BMI

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

Company Profile  Alaska Milk Corporation SWOT Analysis

Strengths

■

 AMC's brands rank first and second among food and beverage companies operating in the Philippines.

■

Product diversity is an important strength, leaving AMC less exposed to demand downturns in single product areas.

■

Thanks to its continued promotional initiatives, Alaska Milk has maintained its position as a market leader in the Philippines's liquid canned milk market and strengthened its hold as the second leading brand in the powdered milk category.

■

 A trusted local brand, with an emphasis on quality and nutrition, will prove favourable on the back of new regional food safety scares.

■

 A move towards premiumisation has provided some cushion from volatile ingredient costs, with margins on these items generally higher.

Weaknesses

■

With diversification into food not yet achieved, AMC is vulnerable to declining demand for dairy, typically perceived as a non-essential item.

■

 AMC's commitment to product diversification could jeopardise its focus on the keenly contested dairy sector.

Opportunities

■

Low disposable incomes remain a challenge, yet added-value dairy, such as yoghurt, is a profitable long-term growth channel.

■

Partnerships with established international firms should represent a low-risk, if costly, means of pursuing expansion.

■

Domestic dairy production is low at circa 1% of domestic consumption.

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

SWOT Analysis - Continued

Threats

■

Softer domestic demand conditions could dent demand for non-essential items, such as dairy.

■

Dairy behemoth Nestlé represents a formidable competitor in the battle for market share.

Company Overview

Strategy 

 Alaska Milk Corporation (AMC) is one of the country's leading dairy manufacturers. The market leader in liquid canned milk, AMC also enjoys a dominant position in powdered milk as well as a growing presence in value-added dairy categories, such as yoghurts, and in other branded food categories. Its non-dairy coffee creamer business is operated by Alaska Krem-Top. The company is the local distributor for brands including Quaker Oats, Oreo and Cornflakes. Alaska Milk runs strong marketing and promotional campaigns, which have helped lift its sales in times of flagging consumer confidence levels. In 2012, Dutch dairy cooperative Royal Friesland Campina (RFC) acquired control (98.1%) of the company. Branding Initiatives

Thanks to its continued promotional initiatives, Alaska Milk has maintained its position as a market leader in the Philippine liquid canned milk market and strengthened its hold as the second leading brand in the powdered milk category. By ramping up its branding initiatives, Alaska Milk could facilitate its brand awareness among local consumers and grow its market share in higher-value segments such as the ultra-high temperature (UHT) and ready-to-drink (RTD) markets. Capacity And Portfolio Expansion

 Another priority for Alaska Milk is to continue strengthening its core milk product portfolio and venture into new markets through product innovation. In 2010, for instance, Alaska Milk entered the non-dairy coffee creamer category with the launch of its Alaska Krem-Top Coffee Creamer, and in 2014 it launched its first prenatal and infant formula line under RFC's Friso brand. As Alaska Milk continues to invest capital expenditure in order to expand its production capacity and, similarly, to expand its product portfolio, it should look forward to stronger sales opportunities over the coming years. Ramping Distribution

Building a wide distribution network is arguably the most integral factor for consumerfacing players to enjoy success in the Philippines, and Alaska Milk clearly recognises this importance. Alaska Milk has collaborated with organised grocery retailers in the

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

country to facilitate the distribution of its milk products, ensuring an effective reach across the country. As organised retail spreads across the Philippines in the coming years, this should enhance Alaska Milk's presence in the country. Financial Data

For year ending December: ■

■

■

■

■

2011 sales: PHP11,802.0mn, decrease of 3% 2010 sales: PHP12,162.7mn, growth of 15% 2009 sales: PHP10,580.4mn, growth of 6.2% 2008 sales: PHP9,967.8mn, growth of 9.8% 2007 sales: PHP9,081.8mn, growth of 53.4%

© Business Monitor International Ltd

Page 37

Philippines Food & Drink Report Q2 2017

LT Group SWOT Analysis

Strengths

■

 Access to a market with a high tolerance of alcohol consumption and relatively high per capita consumption rates translates into reasonably strong growth opportunities.

■

 Aggressive expansions have expanded LT Group's domestic reach and put it in a better position to tap into the Philippines's spirits growth.

Weaknesses

■

LT Group competes with Ginebra, which is backed by high-spending behemoth SMC, in the spirits category.

■

Beer accounts for three-quarters of alcoholic drink sales in the country, thus limiting the audience for spirits.

■

Opportunities

■

Spirits typically carry high sales values and are thus prohibitive to many consumers.  An increasing number of women in the workforce should boost female spending power, and with this comes a key audience for spirits distributors.

■

LT Group's wide white spirits portfolio should prove popular, with such products typically considered to be healthier and purer than darker varieties

Threats

■

The high value spirits sector could be badly affected by a slower than expected domestic demand outlook, with consumers reducing spending on non-essential, higher-value products.

■

 As yet, there has been limited multinational penetration into the Philippines's alcoholic beverages sector. However, as incomes rise, high profile multinationals may enter the market.

■

 A ruling by the WTO (about the Philippines's high excise taxes on imported spirits) would threaten the market share of LT Group.

Company Overview

LT Group (formerly Tanduay Holdings) engages in the manufacture and sale of liquor products primarily in the Philippines. It has a diversified portfolio including rum, gin,

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

brandy, vodka and whisky. The company also manufactures fodder yeast and distributes related liquids and products. The company has a history of name changes, being known as Asian Pacific Equity Corporation prior to November 1999, and Tanduay Holdings prior to November 2012. In April 2013, LT Group floated on the Philippine Stock Exchange in the country's largest ever equity sale, raising PHP37.72bn (USD912.2mn). Strategy 

LT Group adopts an aggressive growth strategy. The company shops very aggressively for acquisitions, as well as committing funds to the expansion of existing facilities. In February 2013, LT Group acquired five investment management firms as an extension of its business. In addition, LT Group is constantly looking for means of expanding its consumer base, and is therefore considering entering other markets in the region. The importance of geographical diversification is further accentuated by the WTO's recent ruling that the Philippines's high excise taxes on imported spirits are inconsistent with WTO's regulation that member states are not allowed to tax imported spirits differently from domestically produced spirits. The consequential removal of trade barriers would inevitably threaten the market share of LT Group. The magnitude of trade barriers in the Philippine spirits market has protected the dominance of domestic spirits producers, and these companies are at greatest risk from a potential liberalisation of the country's trade regulations. In order to retain healthy earnings growth, which has come under pressure recently from higher commodity costs, the company seeks to acquire immediately profitable partners rather than snapping up bargain companies and rebuilding them. In November 2009, the company issued a PHP5bn retail bond, funds from which went towards expansion and paying down existing debt.

Financial Data

For year ending December: ■

■

■

■

■

■

2015 sales: PHP54,374mn, growth of 4.3% 2014 sales: PHP52,154mn, decline of 6.6% 2013 sales: PHP55,792mn, growth of 82.5% 2012 sales: PHP30,568mn, growth of 146.3% 2011 sales: PHP12,410mn, growth of 7.9% 2010 sales: PHP11,496mn, growth of 12.7%

© Business Monitor International Ltd

Page 39

Philippines Food & Drink Report Q2 2017

Philippine Seven Corp SWOT Analysis

Strengths

■

Philippine Seven is a clear market leader in the increasingly profitable convenience sector.

■

Being the franchise operator of arguably the world's best-known convenience retail brand gives it a strong foothold in the Philippines's convenience retail sector.

■

The early adoption of cutting edge retail technology, such as point-of-sale monitoring, allows for the tracking of fast-changing consumer purchasing habits.

■

The company has shown itself willing to close under-performing outlets and to adopt an aggressive approach to expansion.

Weaknesses

■

In operating in the convenience retail sector exclusively, price is a greater barrier for Philippine Seven than for other modern retailers.

■

Opportunities

■

Opportunities to boost same-store sales are restricted by limited floor-space.  A focus on smaller convenience stores allows the company to expand into otherwise crowded areas.

■

Combining the convenience offering with a fresh and healthy food focus has proved popular throughout Asia and should likewise be so in the Philippines.

■

Expansion into provincial areas, where there is minimal competition, provides a strong opportunity for uncontested brand building

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

SWOT Analysis - Continued

Threats

■

Expansion has affected group profitability and this could impact on future growth initiatives.

■

With consumers already paying high prices for convenience, the company would most likely be severely hit by slower domestic demand.

■

The threat of multinational retailers entering the market looms large, with convenience possibly a favoured channel for these experienced companies.

■

The entry of Japanese convenience store operator FamilyMart in 2013.

Company Overview

Philippine Seven is the franchise operator of 7-Eleven convenience stores in the country. There are just over 1,700 stores in the Philippines (both self-managed and franchised), making it the market leader by some distance. The company continues to expand both inorganically - acquiring the 35-outlet-strong Bingo chain in 2004 - and organically, via new store openings. It has also expanded into 'grab-and-go' fast-food business.

Strategy 

Philippine Seven has undertaken a rapid expansion of its stores, which stood at below 800 in 2011, but now exceed 1,700. In 2005, it focused on identifying strategic locations for further store openings, and in 2006 it focused on increasing its level of promotional activity in order to boost same-store sales, as well as opening new outlets. In 2007, new store openings returned as a priority. Despite continuing to expand throughout the country's economic downturn in late 2008 and 2009, the company's pace of expansion really ramped up again in 2010. Between October 2009 and September 2010, the firm opened 120 new outlets. In addition to expansion, three other elements of the company's strategy are notable. First, it is looking for provincial openings in order to diversify its geography and broaden its consumer base. Secondly, the company has acknowledged the need to expand in a more cost-effective manner, in order to improve its profitability (this could mean a greater emphasis on franchising down the line since this is typically a cost effective means of opening new stores). Finally, it continues to adopt a very active corporate social responsibility programme, the benefits for the company being improved branding opportunities.

© Business Monitor International Ltd

Page 41

Philippines Food & Drink Report Q2 2017

Financial Data

For year ending December: ■

■

■

■

■

■

2015 sales: PHP22.4bn, growth of 16.0% 2014 sales: PHP19.3bn, growth of 36.7% 2013 sales: PHP14.1bn, growth of 9.7% 2012 sales: PHP12.9bn, growth of 22.3% 2011 sales: PHP10.5bn, growth of 24.5% 2010 sales: PHP8.5bn, growth of 27.3%

© Business Monitor International Ltd

Page 42

Philippines Food & Drink Report Q2 2017

San Miguel Brewery  SWOT Analysis

Strengths

■

The backing of a financially powerful parent company that is one of the region's largest conglomerates provides a strong capacity for expansions.

■

 A stranglehold over the domestic beer market and equipped with a brand that is globally renowned.

■

Equipped with an extensive and efficient distribution network, covering both the on trade and the off trade.

• Beer accounts for three-quarters of local alcoholic drink sales, representing a massive market for SMB. Weaknesses

■

SMB is unlikely to see its beer market share rise further and consequently domestic investments are generally just for market share preservation.

■

Branded alcoholic drinks do not appeal to the entire population due to price constraints, particularly among lower-income rural groups.

Opportunities

■

The immature markets of Cambodia, Laos and Myanmar represent high growth opportunities for the brewer.

■

Economic growth will boost sales of beer at the premium end of the market.

■

The parent corporation has announced intentions of spending PHP281bn on expansion through 2020.

Threats

■

Economic growth in the country should encourage other brewers to look to the market, leading to enhanced competition, even if SMB's dominance is not realistically under threat.

■

Concerns remain that investment funds from other SMC businesses will be drained to support expansion in heavy industries.

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

Company Overview

San Miguel Corporation (SMC) is the country's largest food and beverage company and one of the largest firms operating in South East Asia. San Miguel Brewery (SMB) is its spun-off and independently listed beer unit, in which Japanese brewing giant Kirin owns a 48% stake. The subsidiary controls 95% of the local beer market via five key brands, while the eponymous San Miguel brand is famous worldwide.

Strategy 

In January, SMC announced that it would spend USD300mn on a new brewery in Cagayan de Oro City and to increase the capacity of its Sta Rosa plant. This is in addition to the company's five production facilities located across the Philippines, which serve just under half a million retail units, and its six facilities located outside of the Philippines.  As the dominant player in the Philippine alcoholic drinks sector, SMB would have to pursue opportunities outside the Philippines to sustain growth. Despite already dominating the beer market in the Philippines, SMB remains one of the most active players in the domestic beer sector and plans to install four new bottling plants across the country to further spread its dominance. According to media reports, each plant, which is estimated to cost around PHP1bn (USD23.1mn), is expected to contribute an additional 22mn cases of beer to SMB's total output. In line with domestic wealth accrual, consumers are likely to gradually trade up to more expensive beer brands and variants, thus creating a strong opportunity for SMB.

Financial Data

For year ending December (results for San Miguel Corporation): ■

■

■

■

2013 sales: PHP747.7bn, growth of 6.92% 2012 sales: PHP699.4bn, growth of 30.5% 2011 sales: PHP535.8bn, growth of 117.7% 2010 sales: PHP246.1bn, growth of 41.3%

© Business Monitor International Ltd

Page 44

Philippines Food & Drink Report Q2 2017

SM Investments SWOT Analysis

Strengths

■

 As the market leader, SM enjoys a very dominant position and has ensured that its name is synonymous with modern retailing in the country.

■

 A multi-format operation allows SM to appeal to a wider range of consumers and cater for more diverse shopping occasions.

■

SM Investments represents a powerful parent, and operational synergies are evident, particularly with regard to real estate

Weaknesses

■

Modern retailing continues to account for only a small proportion of retail sales, with price a major barrier to SM growing its customer base.

Opportunities

■

Expansion opportunities outside of Manila are currently fairly limited.

■

Expanding its store network through its partnership with WalterMart will improve SM's economies of scale and its buying and negotiating power.

■

Should scale increase sufficiently to allow for aggressive purchasing and pricing, the discount offering could represent a viable growth path for SM.

■

Private labelling should prove popular with consumers who are interested in modern retail but still want low prices.

■

 Added-value products and services represent cost-effective ways of boosting sales without having to invest in store number expansion.

■

Further expansion of the SaveMore discount channel will enable SM to harness the potential of lower-income groups.

Threats

■

The arrival of multinational competition would place SM's market share under serious strain.

■

 Volatile operating costs could threaten profitability, with SM unable to pass these costs on to its price sensitive customers.

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

Company Overview

SM Investments acquired its grocery retail interests in 2006. It now operates more than 200 outlets under the fascias SM Supermarket, SM Hypermarket, SaveMore (branded discount stores) and WalterMart. In addition to department stores and shopping mall management, SM Investments also has banking, financial services, real estate and tourism interests.

Strategy 

Expansion is currently at the core of SM's retail strategy. The company invested heavily throughout the downturn of late 2008/2009, and in 2010 it doubled its 2009 capital expenditure budget to PHP40.6bn. The company will look to retain its individual subsector leadership positions by gradually increasing its store numbers - discounting appears to have been a particular focus and SM could be looking to leverage its valuable first mover advantage in this area. SM appears to believe that multinational competition in the country will eventually arrive and it wants to have boosted its scale and improved its buying, and thus pricing power, before this happens. In January 2013, SM Group bought into WalterMart, resulting in a 50/50 partnership between the two companies. This has allowed WalterMart to expand its operations, with SM Group financial backing.

Financial Data

For year ending December: ■

■

■

■

■

■

2015 sales: PHP82bn 2014 sales: PHP275.7bn, growth of 8.8% 2013 sales: PHP253.3bn, growth of 13.0% 2012 sales: PHP223.9bn, growth of 12.0% 2011 sales: PHP199.9bn, growth of 13.0% 2010 sales: PHP142.4bn, decline of 3.0%

© Business Monitor International Ltd

Page 46

Philippines Food & Drink Report Q2 2017

Universal Robina Corp SWOT Analysis

Strengths

■

 A diverse product portfolio allows URC to offset category declines in one area with an improved performance elsewhere.

■

Geographic diversity has a similar balancing effect, with a poor performance in one market offset by an improved performance elsewhere.

■

 A willingness to reinvest, in spite of low profitability, is demonstrative of URC's ambition.

Weaknesses

■

Competing with San Miguel, and increasingly with multinationals, means URC must always operate at a stretch of its resources.

■

Managing an underperforming commodities division could divert funds from URC's core food business.

Opportunities

■

Diversification into beverages and the pursuit of growth in this category should boost sales with this being one of the country's fastest-growing consumer goods categories.

■

Most of URC's categories allow for extensive product innovation, which will be vital in achieving competitive differentiation.

■

Heavy marketing and branding expenditure will appeal to the fast-growing youth market.

■

 A commitment to improving distribution should allow URC to broaden its consumer base without the need for considerable investment.

■

Health categories - such as bottled waters and iced teas - represent important longterm growth opportunities, even if returns are currently limited. A proposed JV with Danone will enable URC to diversify and increase the sales of its various beverage products as well as expand its local market share.

■

Continued expansion into high growth neighbouring countries will grow the business's revenues and profits.

© Business Monitor International Ltd

Page 47

Philippines Food & Drink Report Q2 2017

SWOT Analysis - Continued

Threats

■

 A disappointing international performance, although not problematic in the short term, could cause problems going forward, particularly if the high potential of China cannot be harnessed.

■

 As with reinvestment, volatile ingredient costs have negatively impacted profitability.

Company Overview

Universal Robina Corp (URC) is the food and beverage unit of the JG Summit conglomerate. This branded foods company - the market leader in the snacks, candies and chocolate sub-sectors - also operates throughout the wider region in China, Thailand, Malaysia, Singapore, Vietnam, Indonesia and Hong Kong. The company also has a non-core commodities division and a growing beverage business.

Strategy 

URC plans to sustain sales growth in three ways: firstly, by expanding its distribution network from the current 42,000 outlets; secondly, by continuing to be innovative with new product development; and thirdly, through international expansion. The company has invested heavily in developing and finding successful routes to market for its branded food products. While this has negatively impacted profitability, it is viewed as vital in building market share in the face of increased competition, and the company only plans to commit more resources to advertising and promoting its brands. URC acquired Swiss giant Nestlé's local bottled water business Nestlé Waters in 2007, thus significantly expanding its presence in this fledgling sector. However, acquisitions remain a relatively minor part of the company's strategy, with organic expansion favoured. Beyond domestic distribution and new product development, URC intends to continue pursuing international expansion in a bid to lift the contribution of its international division to total sales to 30% from 22.9%. China, Thailand, Malaysia, Singapore, Vietnam, Indonesia and Hong Kong will be key target markets. Last year, URC's capital expenditure was almost 50% of its earnings, with the primary focus of such investment going into the Branded Foods business, primarily in the ASEAN. URC announced in October 2014 that it would enter into a joint venture with Danone which, subject to approval by the boards of both companies, would begin commercial operations by 2015.

© Business Monitor International Ltd

Page 48

Philippines Food & Drink Report Q2 2017

Financial Data

For year ending September: ■

■

■

■

■

■

2015 sales: PHP109,051 2014 sales: PHP92.4bn, growth of 14.1% 2013 sales: PHP81.0bn, growth of 13.8% 2012 sales: PHP71.2bn, growth of 6.0% 2011 sales: PHP67.2bn, growth of 16.4% 2010 sales: PHP57.7bn, growth of 14.4%

© Business Monitor International Ltd

Page 49

Philippines Food & Drink Report Q2 2017

Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of  the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements.

The accompanying charts detail the population pyramid for 2015, the change in the structure of  the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy.

Population (1990-2050) 200

150

100

50

0         0         9         9         1

        0         0         0         2

        5         0         0         2

        0         1         0         2

        f         5         1         0         2

        f         0         2         0         2

        f         5         2         0         2

        f         0         3         0         2

        f         5         3         0         2

        f         0         4         0         2

        f         5         4         0         2

        f         0         5         0         2

Philippines - Population, mn

f = BMI forecast. Source: World Bank, UN, BMI

© Business Monitor International Ltd

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Philippines Food & Drink Report Q2 2017

Philippines Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS)

Source: World Bank, UN, BMI

Table: Population Headline Indicators (Philippines 1990-2025)

1990

2000

2005

2010

2015f

2020f

2025f

61,947

77,932

86,141

93,038

100,699

108,435

116,151

na

2.2

1.8

1.5

1.6

1.4

1.3

Population, total, male, '000

31,292

39,249

43,293

47,059

50,812

54,578

58,308

Population, total, female, '000

30,654

38,683

42,848

45,979

49,886

53,856

57,843

Population ratio, male/female

1.02

1.01

1.01

1.02

1.02

1.01

1.01

Population, total, '000 Population, % y-o-y

 na = not available; f = BMI forecast. Source: World Bank, UN, BMI

Table: Key Population Ratios (Philippines 1990-2025)

 

 Active population, total, '000  Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age

© Business Monitor International Ltd

1990

2015f

2020f

2025f

57,903 63,915

69,513

74,935

64.1

64.5

27,307 32,517 34,906 35,135 36,783 38,921

41,215

34,640 55.9

78.8

2000

2005

45,414 51,235 58.3

71.6

59.5

68.1

2010

62.2

60.7

63.5

57.6

56.0

55.0

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Philippines Food & Drink Report Q2 2017

Key Population Ratios (Philippines 1990-2025) - Continued

 

1990

Youth population, total, '000 Youth population, % of total working age Pensionable population, '000 Pensionable population, % of total working age

2000

2005

2010

2015f

2020f

2025f

25,360 30,001 31,957 31,270 32,171 33,363

34,386

73.2

66.1

62.4

54.0

50.3

48.0

45.9

1,946

2,516

2,948

3,864

4,611

5,558

6,828

5.6

5.5

5.8

6.7

7.2

8.0

9.1

f = BMI forecast. Source: World Bank, UN, BMI

Table: Urban/Rural Population & Life Expectancy (Philippines 1990-2025)

1990

Urban population, '000 Urban population, % of total Rural population, '000

2020f

2025f

30,100.2 37,372.4 40,144.5 42,104.8 44,683.3 47,993.7

52,170.6

48.6

2000

48.0

2005

46.6

2010

45.3

2015f

44.4

44.3

44.9

31,847.1 40,559.8 45,996.9 50,934.1 56,016.1 60,442.1

63,980.8

Rural population, % of total

51.4

52.0

53.4

54.7

55.6

55.7

55.1

Life expectancy at birth, male, years

62.6

63.7

64.1

64.5

65.0

65.7

66.3

Life expectancy at birth, female, years

68.1

69.8

70.5

71.2

71.9

72.7

73.5

Life expectancy at birth, average, years

65.3

66.7

67.2

67.7

68.3

69.1

69.7

1990

2000

2005

2010

2015f

2020f

2025f

Population, 0-4 yrs, total, '000

9,450

10,738

11,408

10,730

11,254

11,568

11,732

Population, 5-9 yrs, total, '000

8,402

9,968

10,639

10,308

10,651

11,182

11,505

Population, 10-14 yrs, total, '000

7,508

9,294

9,909

10,231

10,265

10,612

11,148

Population, 15-19 yrs, total, '000

6,610

8,229

9,131

9,768

10,123

10,170

10,540

Population, 20-24 yrs, total, '000

5,855

7,206

7,951

8,386

9,580

9,956

10,044

Population, 25-29 yrs, total, '000

5,140

6,246

6,927

7,415

8,188

9,396

9,811

Population, 30-34 yrs, total, '000

4,416

5,516

6,015

6,806

7,238

8,023

9,253

Population, 35-39 yrs, total, '000

3,753

4,845

5,323

6,075

6,640

7,083

7,884

Population, 40-44 yrs, total, '000

2,636

4,151

4,673

5,542

5,910

6,480

6,936

Population, 45-49 yrs, total, '000

2,133

3,494

3,981

4,728

5,354

5,726

6,298

f = BMI forecast. Source: World Bank, UN, BMI

Table: Population By Age Group (Philippines 1990-2025)

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Population By Age Group (Philippines 1990-2025) - Continued

1990

2000

2005

2010

2015f

2020f

2025f

Population, 50-54 yrs, total, '000

1,723

2,398

3,310

3,926

4,503

5,116

5,490

Population, 55-59 yrs, total, '000

1,386

1,879

2,225

2,990

3,666

4,221

4,815

Population, 60-64 yrs, total, '000

983

1,444

1,693

2,262

2,708

3,338

3,861

Population, 65-69 yrs, total, '000

788

1,070

1,239

1,507

1,953

2,351

2,916

Population, 70-74 yrs, total, '000

548

672

855

1,162

1,216

1,589

1,925

Population, 75-79 yrs, total, '000

362

447

480

721

845

892

1,177

Population, 80-84 yrs, total, '000

178

221

257

341

424

505

541

Population, 85-89 yrs, total, '000

54

83

90

106

141

179

216

Population, 90-94 yrs, total, '000

11

18

21

22

26

36

46

Population, 95-99 yrs, total, '000

1

1

2

2

3

3

5

Population, 100+ yrs, total, '000

0

0

0

0

0

0

0

1990

2000

2005

2010

2015f

2020f

2025f

Population, 0-4 yrs, % total

15.25

13.78

13.24

11.53

11.18

10.67

10.10

Population, 5-9 yrs, % total

13.56

12.79

12.35

11.08

10.58

10.31

9.91

Population, 10-14 yrs, % total

12.12

11.93

11.50

11.00

10.19

9.79

9.60

Population, 15-19 yrs, % total

10.67

10.56

10.60

10.50

10.05

9.38

9.07

Population, 20-24 yrs, % total

9.45

9.25

9.23

9.01

9.51

9.18

8.65

Population, 25-29 yrs, % total

8.30

8.02

8.04

7.97

8.13

8.67

8.45

Population, 30-34 yrs, % total

7.13

7.08

6.98

7.32

7.19

7.40

7.97

Population, 35-39 yrs, % total

6.06

6.22

6.18

6.53

6.59

6.53

6.79

Population, 40-44 yrs, % total

4.26

5.33

5.43

5.96

5.87

5.98

5.97

Population, 45-49 yrs, % total

3.44

4.48

4.62

5.08

5.32

5.28

5.42

Population, 50-54 yrs, % total

2.78

3.08

3.84

4.22

4.47

4.72

4.73

Population, 55-59 yrs, % total

2.24

2.41

2.58

3.21

3.64

3.89

4.15

Population, 60-64 yrs, % total

1.59

1.85

1.97

2.43

2.69

3.08

3.32

Population, 65-69 yrs, % total

1.27

1.37

1.44

1.62

1.94

2.17

2.51

Population, 70-74 yrs, % total

0.89

0.86

0.99

1.25

1.21

1.47

1.66

Population, 75-79 yrs, % total

0.59

0.57

0.56

0.78

0.84

0.82

1.01

Population, 80-84 yrs, % total

0.29

0.28

0.30

0.37

0.42

0.47

0.47

f = BMI forecast. Source: World Bank, UN, BMI

Table: Population By Age Group % (Philippines 1990-2025)

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Population By Age Group % (Philippines 1990-2025) - Continued

1990

2000

2005

2010

2015f

2020f

2025f

Population, 85-89 yrs, % total

0.09

0.11

0.11

0.11

0.14

0.17

0.19

Population, 90-94 yrs, % total

0.02

0.02

0.02

0.02

0.03

0.03

0.04

Population, 95-99 yrs, % total

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Population, 100+ yrs, % total

0.00

0.00

0.00

0.00

0.00

0.00

0.00

f = BMI forecast. Source: World Bank, UN, BMI

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Glossary  Food & Drink Food Consumption: All four food consumption indicators (food consumption in local currency, food consumption in US dollar terms, per capita food consumption and food consumption as a percentage of  GDP) relate to off-trade food and non-alcoholic drinks consumption, unless stated in the relevant table/  section.

Off-trade: Relates to an item consumed away from the premises on which it was purchased. For example, a bottle of water bought in a supermarket would count as off-trade, while a bottle of water purchased as part of a meal in a restaurant would count as on-trade.

Canned Food: Relates to the sale of food products preserved by canning. This is inclusive of canned meat and fish, canned ready meals, canned desserts and canned fruits and vegetables. Volume sales are measured in tonnes as opposed to on a unit basis to allow for cross-market comparisons.

Confectionery: Refers to retail sales of chocolate, sugar confectionery and gum products. Chocolate sales include chocolate bars and boxed chocolates; gum sales incorporate both bubble gum and chewing gum; and sugar confectionery sales include hard-boiled sweets, mints, jellies and medicated sweets.

Trade: In the majority of BMI's Food & Drink reports, we use the UN Standard International Trade Classification, using categories Food and Live Animals, Beverages and Tobacco, Animal and Vegetable Oils, Fats and Waxes and Oil-seeds and Oleaginous Fruits. Where an alternative classification is used due to data availability, this is clearly stated.

Drinks Sales: Soft drinks sales (including carbonates, fruit juices, energy drinks, bottled water, functional beverages and ready-to-drink tea and coffee), alcoholic drinks sales (including beer, wine and spirits) and tea and coffee sales (excluding ready-to-drink tea and coffee products that are incorporated under BMI's soft drinks banner) are all off-trade only, unless stated.

Mass Grocery Retail Mass Grocery Retail: BMI classifies mass grocery retail (MGR) as organised retail, performed by companies with a network of modern grocery retail stores and modern distribution networks. MGR differs from independent or traditional retail, which relates to informal, independent-owned grocery stores or traditional market retailing. MGR incorporates hypermarket, supermarket, convenience and discount

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retailing, and in unique cases cooperative retailing. Where supermarkets are independently owned and not classified as MGR, BMI will state so clearly within the relevant report.

Hypermarket: BMI classifies hypermarkets as retail outlets selling both groceries and a large range of  general merchandise goods (non-food items) and typically more than 2,500sq m in size. Traditionally only found on the outskirts of towns, hypermarkets are increasingly appearing in urban locations.

Supermarket: Supermarkets are the original and still most globally prevalent form of self-service grocery retail outlet. BMI classifies supermarkets as more than 300sq m, up to the size of a hypermarket. The typical supermarket carries both fresh and processed food and will stock a range of non-food items, most commonly household and beauty goods. The average supermarket will increasingly offer some added-value services, such as dry cleaning or in-store ATMs.

Discount Stores: Although most commonly between 500sq m and 1,500sq m in size, and thus of the same classification as supermarkets, discount stores will typically have a smaller floor space than their supermarket counterparts. Other distinguishing features include the prevalence of low-priced and private label goods, an absence of added-value services, often called a no-frills environment, and a high product turnover rate.

Convenience Stores: BMI's classification of convenience stores includes small outlets typically less than 300sq m in size, with long opening hours and located in high footfall areas. These stores mainly sell fastmoving food and drink products (such as confectionery, beverages and snack foods) and non-food items, typically stocking only two or three brand choices per item and often carrying higher prices than other forms of grocery store.

Cooperatives: BMI classifies cooperatives as retail stores that are independently owned but club together to form buying groups under a cooperative arrangement, trading under the same banner, although each is privately owned. The arrangement is similar to a franchise system, although all profits are returned to members. The term is becoming more archaic, with fewer cooperatives remaining that conform to this model. Most cooperative groups now have a more centralised management structure, operate more like normal supermarkets, and are thus classified as such in BMI's reports.

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Methodology  BMI Food & Drink Forecasting & Sourcing How We Generate Our Industry Forecasts

BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example a deep industry recession, dummy variables are used to determine the level of impact.

Effective forecasting depends on appropriately-selected regression models. BMI selects the best model according to various different criteria and tests, including, but not exclusive to: ■

R2 tests explanatory power; Adjusted R2 takes degree of freedom into account

■

Testing the directional movement and magnitude of coefficients

■

Hypothesis testing to ensure co-efficients are significant (normally t-test and/or P-value)

■

All results are assessed to alleviate issues related to auto-correlation and multi-co-linearity

BMI uses the selected best model to perform forecasting.

It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.

Within the Food & Drink industry, this intervention might include, but is not exclusive to: significant company expansion plans; new product development that might influence pricing levels; dramatic changes in local production levels; product taxation; the regulatory environment and specific areas of legislation; changes in lifestyles and general societal trends; the formation of bilateral and multilateral trading agreements and negotiations; political factors influencing trade; and the development of the industry in neighbouring markets that are potential competitors for foreign direct investment.

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Example of Food Consumption Model:

(Food Consumption)t = β0 + β1*(GDP)t + β2*(Inflation)t + β3*(Lending Rate)t + β4* (Foreign Exchange Rate)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt

Sourcing

BMI uses the following sources in the compilation of data, developments and analysis for its range of Food & Drink reports: national statistics offices; local industry governing-bodies and associations; local trade associations; central banks; government departments, particularly trade, agricultural and commerce ministries; officially-released information and financial results from local and multinational companies; cross-referenced information from local and international news agencies and trade press outlets; figures from global organisations, such as the World Trade Organization (WTO), the World Health Organization (WHO), the United Nations Food and Agricultural Organization (FAO) and the Organisation for Economic Co-operation and Development (OECD).

Risk/Reward Ratings Methodology BMI's approach in assessing the risk/reward balance for food and drink industry investors globally is twofold. First, we identify factors, in terms of current industry/country trends and forecast industry/country growth, that represent opportunities to would-be investors. Second, we identify country and industryspecific traits that pose or could pose operational risks to would-be investors.

Ratings System

Conceptually, the ratings system divides into two distinct areas:

Rewards: evaluation of sector's size and growth potential in each country. This section also includes a strong demographic aspect with a focus on both the size and age distribution (younger being better) of  populations.

Risks: evaluation of industry-specific risks and those emanating from the country's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period.

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Indicators

The following indicators have been used.

Table: Rewards

Industry Rewards

Food and drink consumption per capita, US$

Indicator denotes overall breadth of market. Wealthier markets score higher.

Per capita food consumption growth, five-year compound annual growth, %

Lead Food & Drink growth indicator. Scores based on compound annual growth over our five-year forecast period.

Market fragmentation

Subjective score reflecting how relatively developed the industry is. Higher score reflects a more fragmented industry.

Country Rewards

Population size (mn)

Indicator denotes size of market.

GDP per capita, US$

Proxy for wealth. Size of population is important, but needs to be considered in relation to spending power. High-income states receive better scores than low-income states.

Youth population, %

0>15%, % of total working age population. Younger populations are generally considered to be more desirable.

NB See Business Environment section for regional and country-specific ratings explanations. Source: BMI

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